First Impressions

Stuart McClymont, managing director, JDX Consulting – Financial Services Infrastructure

“We’ve got lots of people and lots of different technologies, but we’ve got common problems; common issues that try to reduce the amount of duplication and operation processes for a common function.”

Stuart McClymont, managing director at JDX Consulting, explains the infrastructure for financial services. He gives a brief history of how the industry functioned without today’s technology, and then delves into how the technology boom in the 90’s created an influx of new opportunities for the markets and its participants. One key point was how companies needed to collaborate more together in order to use new technology efficiently. McClymont also touches on opportunities for the future and where the industry is headed from here.

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Quote of the Day

Under this strategy, once inflation becomes modest, as today, Federal Reserve policy in the near term focuses on sustaining trend growth at full employment at the prevailing inflation rate. At this point the short-run priorities are twofold: sustaining the expansion and preventing an acceleration of inflation. This is, nevertheless, a strategy for disinflation because it takes advantage of the opportunity of inevitable recessions and potential positive supply shocks to ratchet down inflation over time.

Former Federal Reserve governor Laurence Meyer in 1996 in the story, “What should the Federal Reserve do?: The case for opportunistic inflation”.

Lead Stories

Dead Bond Market Creating Ideal Conditions for Tantrums
Lisa Abramowicz – Bloomberg
It’s getting quiet in the Treasury market.
U.S. government-debt trading at Wall Street’s biggest banks has fallen 8 percent since the end of October from the comparable period last year, according to Federal Reserve data. It’s down for the year, too, even with an unprecedented one-day surge in activity on Oct. 15.
While slow markets have pretty much always been bad for banks because they usually profit from more trading, the implications may be far greater this time.

Rate rises spark ‘massive volatility’ warnings
Matt Clinch – CNBC
Vastly divergent policies from global central banks have sparked investor concern that 2015 is set to be a turbulent year, as the Bank of England (BoE) details the dangers that an interest rate rise poses for the nation’s housing market.
“Next year is going to be massively volatile because you’ve got all the major central banks doing things they don’t really know how to do,” Peter Sullivan, head of European equities at HSBC, told CNBC Monday.

Banks’ U.S. Debt Holdings Top $2 Trillion as Treasuries Rally
Susanne Walker – Bloomberg
American banks increased U.S. government debt holdings to a record $2 trillion as global regulators implement post-2008 financial-crisis rules requiring financial institutions to own the highest-quality assets while trimming risk-taking activities.
U.S. debt has returned 5.3 percent this year as commercial lenders increased their net holdings of Treasuries to $615.6 billion this year as of Nov. 26, little changed from the highest ever, data from the Federal Reserve show. Banks have been net buyers of Treasuries and other agency debt for 14 straight months, equaling the longest streak of gains since June 2003.

One Hundred Years of Bond History Means Bears Destined to Lose
Daniel Kruger and Liz Capo McCormick – Bloomberg
If you’re convinced the plummet in yields of U.S. government bonds is an aberration, it may be because you haven’t been in the business long enough.
With the longest-dated Treasuries now yielding less than half the 6.8 percent average over the past five decades, it’s not hard to see why forecasters say they’re bound to rise as the Federal Reserve prepares to raise interest rates following the most aggressive stimulus measures in its 100-year history. Yet compared with levels that prevailed in the half-century before that, yields are in line with the norm.

Russia Pain Spreads to Stock and Bond Markets as Ruble Plunges
Boris Korby and Elena Popina – Bloomberg
Russia’s worsening economic crisis is spreading through its corporate bond and stock markets as a tumbling ruble and plunging growth erode confidence in companies recently seen as able to withstand the turmoil.
UBS AG cut stock ratings for seven retail and Internet companies today including Lenta Ltd. and Yandex NV. Petropavlovsk Plc, Russia’s third-biggest gold producer, agreed with most of its investors to a rescue package that includes selling $335 million of shares and bonds to cut debt. More than 50 of the country’s corporate bonds now yield at least 10 percentage points more than Treasuries, levels considered distressed.

The Ten Reasons Why There Will Be Another Systemic Financial Crisis
Robert Lezner – Forbes
Jamie Dimon, chairman and CEO of JP Morgan Chase , has “a healthy fear of the unknown,” as in the “unknown” but sooner or later expected financial crisis in our future. Warren Buffett, the chairman of Berkshire Hathaway reckons there will be a “discontinuance,” a financial crisis in the form of a disruption, disjunction, or interruption that emanates from the impossible to understand massive derivatives bets on the balance sheets of the major banks.

Central Banks

What should the Federal Reserve do?: The case for opportunistic inflation
The Economist
Sometime next year, the Federal Reserve will likely face an unusual confluence of economic circumstances. One of its mandates, full employment, will call for monetary policy to tighten relatively quickly; the other, inflation, will suggest it should stay loose. How should the Fed weigh these competing goals? It may want to dust off a doctrine from the 1990s, “opportunistic disinflation” and rechristen it “opportunistic inflation.”

The Fed’s plan to “normalise” interest rates
Gavyn Davies – Financial Times
One of the most successful rules for investors in the past few years has been never to underestimate the innate dovishness of the Federal Reserve. Whenever there has been a scare that the Fed might move in a hawkish direction, this has quickly proven to be a mistake. Forward curves for short term interest rates have consistently moved “lower for longer”, and incoming economic data have always ensured that the Federal Open Market Committee (FOMC) has remained comfortable with this tendency.

ECB Slows Asset Purchases Even Amid Draghi Balance-Sheet Pledge
Alessandro Speciale and Alastair Marsh – Bloomberg
The European Central Bank slowed asset purchases last week, underlining the challenge for policy makers trying to expand the institution’s balance sheet.
The ECB settled 233 million euros ($286 million) of asset-backed-securities purchases in the week ended Dec. 5, after spending 368 million euros in the first week of the program. The Frankfurt-based central bank also bought 3.126 billion euros of covered bonds, down from 5.078 billion euros the previous week.

Keep an eye on the Fed’s accelerating asset sales
Michael Ivanovitch – CNBC
The U.S. monetary authorities (Fed) are stepping up the contraction of their balance sheet at a surprisingly fast pace. Since peaking at $4.07 trillion last August, the Fed’s monetary base has been reduced by $259.2 billion as of the latest reserve reporting date on November 26, 2014.

BOE Looks Beyond Rate Guidance in U.K. Bank Stress Test
Ben Moshinsky and Jennifer Ryan – Bloomberg
The Bank of England is willing to put aside its own forward guidance to determine how well the country’s eight largest lenders would fare in a crisis.
Governor Mark Carney has said rate increases from the current record-low 0.5 percent are likely to be gradual and the peak in rates lower than in previous cycles. Yet in its stress test of the U.K.’s eight largest banks, the BOE assumes an increase to 4 percent by the end of 2015.

New York Fed Creates New Group and Names Alberto G. Musalem Head
Press Release – New York Federal Reserve
The Federal Reserve Bank of New York announced today the formation of the Integrated Policy Analysis Group (IPA), and named Alberto G. Musalem, executive vice president of the Emerging Markets and International Affairs Group (EMIA), as head of the new group.
IPA is designed to enhance the New York Fed’s capacity to develop a more comprehensive and integrated view of the global economic and financial environment, in order to help inform and strengthen decision-making across the Bank’s monetary, supervisory and payments policy responsibilities as part of the Federal Reserve System.


Emerging-Markets Currencies Tumble to Decade-Low on Dollar, Oil
Ye Xie – Bloomberg
Nothing’s going right for emerging-market currencies these days.
Oil prices are falling the most in six years, undermining exchange rates of energy producers from Latin America to Russia, just as slowing growth in China and a tumbling yen weigh on currencies across Asia. And surging demand for the dollar, the result of speculation that U.S. interest rates will rise, is adding to the woes of developing-nation currencies.

Strong dollar may have ‘profound impact’ on world economy
Sara Sjolin – MarketWatch
With the dollar marching closer to an eight-year high, the impact of a solid greenback has started to worry traders and economists.
The Bank for International Settlements, referred to as the central bankers’ bank, warned in its quarterly review that the strengthening dollar could “have a profound impact on the global economy,” and particularly on emerging markets.

Indexes & Index Products

Shanghai Composite Index Tops 3,000 for First Time Since 2011
Weiyi Lim – Bloomberg
China’s Shanghai Composite Index surpassed 3,000 for the first time in three years and a gauge of the nation’s biggest companies capped a record winning streak on optimism shares will extend their world-beating rally.
Citic Securities Co. and Haitong Securities Co., the nation’s biggest securities firms, jumped 10 percent, adding to gains of at least 75 percent over the past month. Ping An Insurance (Group) Co. surged 9.6 percent. Sany Heavy Industry Co. rose the most in a decade. PetroChina Co. added 2 percent.

Why the stock market’s ‘solitary walk’ is worrisome
Fox Business
While I believe the market averages will be higher in the spring, in my opinion there is a continuing deterioration of the market’s internal strength at work despite the recent highs in the major stock indexes.
This condition is being created by the growing lack of participation in the rally of many smaller and mid-sized stocks.

Morningstar Launches Family of More Than 60 New Global Equity Indexes, Providing Investors with Comprehensive View of Worldwide Markets
Press Release via CNN Money
Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, has launched more than 60 new global equity indexes. Now, Morningstar’s index family spans 45 countries in both developed and emerging markets. The new indexes provide investors with benchmarking tools that reflect the performance of equity markets worldwide and will serve as the foundation for the next generation of Morningstar “strategic beta” indexes. Morningstar’s index business is part of the Morningstar Investment Management group.


A Gold Man In Monetarist Territory
Keith Weiner – Forbes
On November 3, the Manhattan Institute hosted the fall meeting of the Shadow Open Market Committee (SOMC). This is a 40-year old group, with many illustrious economists among its membership, starting with its founder, Allan Meltzer.
The SOMC is not shy about criticizing the Federal Reserve, though they remain committed Monetarists. These students of the Chicago School make a great show of their dispute with the followers of John Maynard Keynes. Monetarists lean more towards free markets, but both schools share one key idea: fiat currency.

Gold jumps above $1,200/oz on chart-based buying surge
Marcy Nicholson and Clara Denina – Reuters
Gold jumped more than 1 percent on Monday on a brief surge of late-day technical buying as it breached the $1,200-per-ounce level long after the U.S. dollar dropped from a more than five-year high.
Spot gold was up 1 percent at $1,203.51 an ounce by 3:01 p.m. EST (2001 GMT) after briefly rising to $1,208.19. The metal lost 1.1 percent on Friday when U.S. data showed employers added the largest number of workers in nearly three years in November and that wages picked up.

Short Covering Lifts Speculators’ Gold Holdings In Latest CFTC Data
Kitco news via Forbes
Short covering lifted large speculators’ Comex gold futures and options holdings in the latest Commodity Futures Trading Commission weekly data, after a modest increase in gold prices in the timeframe covered by the report, which is for the week ending Dec. 2.
Since funds arrested the slide in their net-long holdings in the past few reports, the rise in net-long holdings have come mostly on the back of short covering, rather than a big build of new bullish positions. Short covering is when market participants buy back previously sold positions and exit the trade.

Five Myths About Gold
Clem Chambers – Forbes
I love gold. I believe it will be $5,000 an ounce one day. Clearly that’s not going to be soon.
The credit crisis crash and its following long recession has been a long and fascinating journey and perhaps it is now all over. We are possibly in a new era with a new set of rules and likely a new set of bubbles and crashes ready to meet us.
Meanwhile gold remains gold; a beautiful metal that has for millennia been the symbol and medium of the transfer of power.

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